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All Contents © 2020The Kiplinger Washington Editors
By Will Ashworth, Contributing Writer
| November 18, 2019
One of the most attractive reasons to invest in health-care stocks continues to be the world's aging population.
The United Nations says people age 65 and older are the fastest-growing age group worldwide. It estimates that by 2050, one out of every six people will be 65 or older, accounting for 16% of the planet's total population, up from 9% in 2011. That figure is even larger in Europe and North America, where the U.N. predicts the number will be closer to 25%. The demand for health-care products and services should only increase as a result.
Yes, health-care stocks will be coming off a weak 2019. Through mid-November, the S&P 500 was sitting on nearly 25% gains, while the sector had improved by roughly half that. They'll also have to contend with uncertainty regarding the future of health care as the 2020 presidential election approaches. But don't sleep on the space in the year ahead.
For one, health-care stocks tend to outperform during periods of economic weakness. For instance, the Health Care Select Sector SPDR Fund (XLV) delivered a 39.6% total loss (share price plus dividends) during the 2007-09 bear market – more than 15 percentage points better than the S&P 500. Thus, headlines warning of an economic slowdown or even a recession in 2020 actually bode well for the sector.
Also, health care has traded at a price-to-earnings ratio more expensive than the overall market more often than not over the past 20 years. However, according to the Charles Schwab Center for Research, the sector's P/E currently is cheaper than the S&P 500, providing a better buying opportunity.
Here, then, are the 13 best health-care stocks to buy for 2020, including a couple of funds for investors who want to diversify.
Data is as of Nov. 15. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Analyst opinions from The Wall Street Journal.
Market value: $255.2 billion
Dividend yield: 1.6%
Analysts' opinion: 20 Buy, 2 Overweight, 4 Hold, 0 Underweight, 0 Sell
2019 has been a volatile affair for longtime UnitedHealth Group (UNH, $269.40) shareholders who have seen their stock crest above $265, then fall back below $220, twice this year. They'll find out soon whether UNH can sustain its current attack above $265.
"Medicare for All" (MFA) has been the biggest headwind holding the medical benefits provider back – something that can be said about many of the market's best health-care stocks. CEO David Wichmann is on record stating that the plan from several Democratic presidential candidates, including Elizabeth Warren, would hurt American health care.
"(MFA) would surely jeopardize the relationship people have with their doctors, destabilize the nation's health system and limit the ability of clinicians to practice medicine at their best," Wichmann said in the company's Q1 2019 conference call in April. "And the inherent cost burden would surely have a severe impact on the economy and jobs – all without fundamentally increasing access to care."
You can argue about whether Wichmann's assertion would come to fruition. However, it's difficult to argue with how well he's steered the ship in 2019. UNH's revenues grew 8% year-over-year to $181.3 billion through the first three quarters of 2019, powered by growth across all four of its major revenue streams. The company's operating profit was $14.6 billion – 14.1% higher than in the year-ago period.
Perhaps even more impressive is UnitedHealth's ability to generate cash. Through the first nine months of the year, it converted 103% of its $10.6 billion in net income into free cash flow (FCF, the cash left over after capital outlays and investments a firm makes to maintain and expand its business).
When you can do that, you're doing a lot more right than wrong.
Market value: $65.8 billion
Dividend yield: N/A
Analysts' opinion: 10 Buy, 2 Overweight, 4 Hold, 1 Underweight, 0 Sell
Intuitive Surgical (ISRG, $569.54) has been one of the health-care sector's best performers over the past five-, 10- and 15-year periods, generating average annualized total returns of 26.6%, 19.7%, and 30.1%, respectively, through Nov. 14.
It's a different story in 2019, with Intuitive Surgical's stock trailing both its medical-device peers and the U.S. stock market as a whole.
Like UnitedHealth, Medicare for All could be weighing down ISRG as investors contemplate whether hospital spending cuts will reduce the number of da Vinci robotic systems bought as a result of any changes to the current health-care system.
Nonetheless, the number of Intuitive Surgical procedures performed globally continues to grow. In the third quarter, worldwide da Vinci procedures increased by almost 20% year-over-year. And ISRG shipped 275 da Vinci systems during the quarter – 19% higher than a year earlier.
As a result of its strong third-quarter results, Morgan Stanley analyst David Lewis reiterated his Overweight rating (equivalent of Buy), writing, "Phase 1 is still driving significant growth, the company is just scratching the surface on Phase 2, and it is building the foundation for Phase 3." Piper Jaffray's Adam Maeder (Overweight) says he expects Intuitive Surgical will remain the "clear cut leader" in robo-assisted surgery.
They're just two of the 12 analysts with bullish ratings on the health-care stock.
Market value: $64.2 billion
Dividend yield: 4.1%
Analysts' opinion: 10 Buy, 1 Overweight, 1 Hold, 0 Underweight, 0 Sell
Japanese pharmaceutical giant Takeda Pharmaceutical (TAK, $20.37) reported strong second-quarter earnings at the end of October that demonstrated its 14 global brands have plenty of growth ahead of them.
But perhaps the reason TAK belongs among the best health-care stocks to buy in 2020 is its January 2019 acquisition of Shire Pharmaceuticals.
The $62 billion deal made Takeda one of the 10 largest pharmaceutical companies in the world with annual revenues of more than $30 billion. As a result, the combined company now boasts solutions for oncology, gastroenterology, neuroscience, rare diseases, plasma-derived therapies and vaccines. More importantly, the pharma giant gains geographic diversification.
During the first half of fiscal 2019, a six-month period ended Sept. 30, Takeda's Japanese business accounted for just 18% of its $15.3 billion in revenue. A year earlier, its Japanese business accounted for 31% of its overall sales. Revenues from its U.S., European, Canadian, and Latin American regions all doubled through the end of the second quarter.
Takeda said at the time of the acquisition that it expected to gain $1.4 billion in annual cost synergies by January 2022. It planned to use those gains to pay down some of the debt incurred to buy Shire. In the company's first-half results, it noted that it paid down $5.4 billion in debt. Meanwhile, net debt at the end of September was 3.9 times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), down from 4.7x at the end of December.
Market value: $59.0 billion
Analysts' opinion: 20 Buy, 1 Overweight, 1 Hold, 1 Underweight, 1 Sell
Boston Scientific (BSX, $42.31) is a medical devices company based in the Boston-area, hence the name.
In August, Boston Scientific closed its $4.2 billion acquisition of BTG plc, a British-based manufacturer of minimally invasive medical devices. BTG, the second-largest acquisition by the company in its history, specializes in vascular devices that treat pulmonary embolisms and deep vein thrombosis.
The company's three reportable segments – MedSurg, Rhythm and Neuro, and Cardiovascular – generated $845 million, $780 million, and $1.0 billion in revenues, respectively, during the third quarter ended Sept. 30. About 56% of its $2.7 billion in quarterly revenue came from the U.S., with the remainder spread quite evenly throughout the rest of the world. Excluding foreign currency, sales grew 14.2% in the quarter – and of this growth, just 2.1 percentage points were contributed by three recent acquisitions.
Organic revenues should grow by 7.5% overall in 2019, while adjusted profits should increase by 7% to 8%. On top of organic growth, it expects acquisitions to contribute an additional 3.6 percentage points of improvement. More importantly, analysts see big things for 2020 – 12.1% revenue expansion and a 14% pop in earnings per share.
Barclays analyst Kristen Stewart has an Overweight rating on BSX and a $48 price target that implies 13% upside over the next year. She writes that she has faith in the company's ability to hit its high-single-digit organic sales projections.
Market value: $24.0 billion
Analysts' opinion: 16 Buy, 3 Overweight, 4 Hold, 0 Underweight, 0 Sell
Mergers and acquisitions (M&A) have become the lifeblood of the pharma/biotech industry. Alexion Pharmaceuticals (ALXN, $108.37) is no exception.
On Oct. 16, 2019, the Boston-based biopharmaceutical company announced that it would acquire Achillion Pharmaceuticals for $930 million in cash – a 73% premium. Achillion shareholders will enjoy additional benefits should certain clinical and regulatory milestones be met within specified periods.
Alexion is doing the deal to complement Soliris, the company's blockbuster drug to treat paroxysmal nocturnal hemoglobinuria (PNH). This rare blood disease destroys red blood cells, causing hemolysis, anemia, blood clots, heart attacks and strokes. By acquiring Achillion, the health-care stock gains two experimental treatments of PNH, which combined with Ultomiris – Alexion's successor drug to Soliris – provides an obvious advantage in the treatment of this condition.
"The transaction has strong strategic rationale as a defensive play for Alexion versus competitors," writes Evercore ISI analyst Josh Schimmer, who has a Buy rating and $145 price target, implying 34% potential upside.
Investors can expect regulatory pushback on this acquisition, but the deal is expected to close in the first six months of 2020. If successful, Achillion would join other acquisitions, including Syntimmune in 2018 and Synageva BioPharma in 2015, designed to bolster its repertoire of rare-disease treatments.
Market value: $22.3 billion
Analysts' opinion: 6 Buy, 0 Overweight, 2 Hold, 0 Underweight, 1 Sell
If there's one subset of health-care stocks that consumers are wise to invest in, it's anything to do with pets. We spend a fortune on them. In 2018, Americans doled out $72.6 billion to care for their pets. That number's expected to grow nearly 4% to $75.4 billion in 2019. About a quarter of that total will be spent on vet care.
That's good news for companies such as Idexx Laboratories (IDXX, $259.78), which specializes in diagnostic and technology-based products for companion animals. This segment of Idexx's business accounts for 88% of its overall revenue. And while the U.S. does account for its largest chunk of revenues (63%), Europe, Middle East & Africa (EMEA) account for another 20% and Asia is another 10%.
Idexx also is trying to grow through M&A, announcing the acquisition of Wisconsin-based Marshfield Laboratories' veterinary arm in early November. As the veterinary diagnostics landscape becomes more competitive, Marshfield felt an alliance with Idexx was the most sensible approach for its customers. Idexx outbid several large competitors, including Zoetis (ZTS).
The company expects to generate at least $2.61 billion in revenues in 2020 (up 9% year-over-year) and profits of at least $5.30 per share (+12%).
Idexx will try to hit those goals under a new CEO, Jay Mazelsky. He was named the interim chief months ago after CEO Jon Ayers suffered a serious bike accident in June, and was elevated to the role permanently in October. But William Blair analyst Ryan Daniels says any selling on leadership concerns is a buying opportunity. "One of (Ayers') main strengths over the past two decades has been building a deep and impressive team of leaders around him," he writes.
Market value: $4.1 billion
Analysts' opinion: 10 Buy, 0 Overweight, 2 Hold, 0 Underweight, 0 Sell
Most rundowns of the best health-care stocks to invest in include drug companies or medical device businesses. It's not as often that we consider in-home health care, but there's plenty to be said about the roll-up-your-sleeve type of health care that LHC Group (LHCG, $129.71) specializes in.
It's not going away, for one. People want to stay in their homes. In a Nationwide Retirement Institute survey of 1,462 people over the age of 50, more than half said they would rather die than end up in a long-term care facility.
LHC Group got its start in 1994 in Lafayette, Louisiana, providing in-home health care for a single community. It has grown to become one of the leading in-home health-care providers in the U.S., with more than 32,000 employees across 35 states and the District of Columbia. The company's service network currently reaches 60% of the 65-plus market in the U.S.
In April 2018, LHC merged with Almost Family to form the second-largest home health provider in the U.S., with annual revenues of $1.8 billion. Only Kindred Healthcare, with $2.5 billion in annual revenue, is larger – and it was taken private that same year.
Analysts are looking for 6.6% revenue growth to more than $2.2 billion in revenues next year, and a similar bump in profits to $4.72 per share. LHCG isn't followed by many analysts, but the four that have sounded off over the past quarter have all been in the bull camp – including two fresh Buy ratings. That bodes well for shareholders, who have already enjoyed 40%-plus annualized average total returns over the past half-decade.
Market value: $6.8 billion
Analysts' opinion: 13 Buy, 2 Overweight, 2 Hold, 0 Underweight, 0 Sell
Formerly HealthSouth Corporation, Encompass Health (EHC, $69.47) changed its name in January 2018 to reflect its position as a leading provider of integrated post-acute care solutions across the country, not just regionally.
Encompass is the largest owner and operator of inpatient rehab facilities in the U.S., with 131 locations in 32 states and Puerto Rico employing almost 31,000 people. In addition, its home health care and hospice division is the fourth-largest provider of skilled home health services in the U.S. with 10,900 employees serving more than 145,000 patients annually.
The inpatient rehab facilities generate 75% of Encompass' revenue and 91% of its adjusted EBITDA. However, the home health-care business allows Encompass to handle a stroke patient from the time they enter the rehab facility all the way through recovery at home – or through hospice care if they're seriously or terminally ill.
In addition to its organic growth, EHC plans to acquire between four to six inpatient rehabilitation hospitals each year for the foreseeable future, while also committing between $50 to $100 million per year to acquire home health-care businesses. Each of these segments will continue to benefit from an aging population.
While 2020 is expected to be a "reset" year for Encompass Health, BofA/Merrill Lynch analyst Kevin Fischbeck upgraded the stock to Buy in September, writing that all risks have already been priced in. Perhaps most attractive to investors looking for the best health-care stocks for 2020: EHC has little exposure to Medicare for All headline risk.
Market value: $2.2 billion
Dividend yield: 0.5%
Analysts' opinion: 3 Buy, 0 Overweight, 2 Hold, 0 Underweight, 0 Sell
The Ensign Group (ENSG, $41.40) is both an owner and operator of post-acute health care facilities in 16 states, including California, Massachusetts, Texas and Wisconsin.
As of the end of September, The Ensign Group owned 81 skilled nursing and senior living facilities. It operated another 178 facilities under long-term lease arrangements. The 81 facilities it owns accounted for 24% of its 21,080 skilled nursing beds at the end of the third quarter, and 45% of its 6,022 senior living units.
This business is what's left after the Oct. 1, 2019, spinoff of its home health and hospice operations into an independent, publicly traded company called Pennant Group (PNTG). The spinoff was completed so that both companies could focus more on growing their respective businesses.
ENSG looks to continue its history of acquiring underperforming operations then turning them around over time, leading to higher revenues and earnings over the long haul. Management's profit guidance for 2020 shows no lack of confidence in the new streamlined operation, with expectations of between $2.22 and $2.30 per share representing more than 18% year-over-year growth at the midpoint.
The Ensign Group, like Encompass Health, continues to benefit from an aging population.
Market value: $3.4 billion
Analysts' opinion: 15 Buy, 0 Overweight, 0 Hold, 0 Underweight, 0 Sell
While most cannabis-related plays are tethered to commercial distribution, there are still a few health-care stocks in the bunch. GW Pharmaceuticals (GWPH, $108.41) produces Epidiolex, a drug that treats certain types of childhood epilepsy. It is derived from cannabidiol (CBD), which occurs naturally in the Cannabis sativa L. plant.
Epidiolex first launched in the U.S. in 2018, where more than 15,000 Americans have taken it, including 3,000 new patients beginning treatment during the third quarter of 2019. It's now being rolled out across the European Union. France and Germany already sell the drug, and it should launch in the U.K. by the end of the year. Italy and Spain are queued up for 2020.
Investors recently turned their noses up at a Street-beating earnings report from GWPH that included a 25.9% jump in Epidiolex sales. However, Evercore ISI analyst Josh Schimmer said they might have overlooked something else. "Most have missed a critical update from the company – that preclinical studies have proven superior efficacy for Epidiolex versus synthetic CBD" – a "critical step" that could stave off generic competition.
Other reasons for optimism include a much sturdier financial position and more positive pipeline news.
GW Pharmaceuticals has cut its net losses from $295.2 million in the 12 months ended Sept. 30, 2018, to just $38.3 million in the 12 months ended Sept. 30, 2019. That included a tiny $13.8 million loss in the third quarter that was 84% lower than its year-ago deficit.
Meanwhile, BofA/Merrill Lynch's Tazeen Ahmad (Buy) sees great opportunity in the likely supplemental New Drug Application (sNDA) filing for a third indication – seizures associated with tuberous sclerosis complex – in January 2020. Cantor Fitzgerald analyst Charles Duncan (Overweight) also sees a new clinical program for Sativex, in treating multiple sclerosis spasticity in the U.S., as a catalyst for shares.
Market value: $10.1 billion
Analysts' opinion: 5 Buy, 0 Overweight, 4 Hold, 0 Underweight, 0 Sell
"A relief." "Less-bad-than-feared." "Cautiously optimistic."
They're not exactly the screaming analyst recommendations you'd expect to hear about the best health-care stocks for 2020, but in Abiomed's (ABMD, $222.23) case, they're signs of a potential comeback – and Abiomed has quite a ways to come back from.
Abiomed stock traded above $450 on two occasions in 2018, riding strong interest in its Impella heart pump combined with healthy revenue and earnings growth. But since hitting $450 in September 2018, shares have been on a long, gradual decline, falling as low as $155 in early October before rebounding on positive earnings results from the second quarter – results that sparked the analysts' sighs of relief outlined above.
At the end of October 2019, Abiomed reported earnings for its fiscal 2020 second quarter ended Sept. 30. Excluding one-time items, profits of $1.03 per share came in a dime ahead of expectations. Sales rose 13% year-over-year, thanks in part to a 14% increase in patient usage in the U.S. of its Impella heart pumps.
Data released in September by the company shows that its heart pumps have been found to reduce the instances of death, stroke and repeat procedures. It intends to continue improving patient outcomes throughout the remainder of 2020.
The company finished its Q2 in good fiscal shape – zero debt, $114.3 million in free cash flow, and $551 million in cash and marketable securities. Abiomed projects 2020 revenues of between $885 million and $925 million, a growth rate of 15% to 20%, with operating margins of 28% to 30%.
William Blair's Margaret Kaczor (Outperform, equivalent of Buy) says "meaningful reacceleration of sales growth" is possible across the next couple quarters. If that comes to pass, that could trigger a recovery rally in ABMD shares, which still are off 40% over the past year.
Market value: $9.3 billion
Dividend yield: 2.0%
Expenses: 0.10%, or $10 annually on a $10,000 investment
One of the most attractive features of the Vanguard Health Care ETF (VHT, $181.49) is that it provides investors with a diversified portfolio of Wall Street's health-care stocks at a very reasonable fee.
A $10,000 investment a decade ago is today worth more than $47,000, thanks to a 10-year annualized total return of 15.1%. That's 180 basis points (a basis point is one one-hundredth of a percentage point) better than the S&P 500.
The VHT holds nearly 390 stocks, though the 10 largest holdings alone – which include Johnson & Johnson (JNJ), UnitedHealth and Merck (MRK) – account for a little more than 43% of the fund's assets. This means the other 380 or so account for the remaining 57% of the portfolio, or an average of just 0.15% per stock. That's because the fund is market cap-weighted, which means the largest stocks make up the largest portions of the portfolio.
Still, funds such as the VHT benefit investors who know enough to know that having health-care exposure will benefit them, but who would prefer to cast a wide net to catch all the best health-care stocks in the space, rather than do individual stock picking. Vanguard Health Care, like most other Vanguard ETFs, allow investors to do so cheaply.
Market value: $755.4 million
Dividend yield: 0.6%
The Invesco S&P 500 Equal Weight ETF (RYH, $208.51) might not be the largest health-care ETF available to U.S. investors, but it's definitely one of the better ones if you don't want to play favorites.
RYH tracks the performance of the S&P 500 Equal Weight Health Care Index, which includes all of the health-care stocks in the S&P 500. This gives you a decently diversified portfolio that includes large caps (66% of assets) and mid-cap stocks (34%). Unlike market-cap-weighted ETFs such as VHT, which are weighted toward the largest companies, all of RYH's 61 holdings are weighted equally upon rebalancing, which happens four times a year.
For comparison's sake: The Invesco ETF's top 10 holdings account for just 19.1% of its assets, while the Health Care Select Sector SPDR Fund – a cap-weighted fund containing S&P 500 health-care stocks – has just under half its assets invested in its top 10 stocks.
If you want your returns to be dictated by the likes of Johnson & Johnson and UnitedHealth, funds like XLV and VHT will serve you just fine. But if you prefer a broader swath of stocks do some of the driving, RYH is more your speed.
Interestingly, while RYH and VHT often enter periods of outperformance against one another, their 10-year returns are very close. The RYH has delivered an annualized 15.3% over the past decade.